The debt ceiling is bad for America

We all know that politics makes strange bedfellows, but the events of the last couple of days leave even the most politically savvy analysts scratching their heads. This week, President Trump struck a deal with Democratic congressional leaders to temporarily raise the debt ceiling and fund the government through mid-December ostensibly to clear the legislative path for his tax reform proposals.

This deal was widely derided by Republican congressional leaders and others as simply kicking the can down a short road and delaying the political showdown from September to December. Ironically, those same congressional leaders would have been happy kicking the can further down that same road rather than permanently solving this recurring problem.

{mosads}The deal was what can only be described as a plot twist that few saw coming, even in the context of a rollercoaster administration that has all too often substituted disruption for strategy. The next day witnessed a Republican president declaring that there are “a lot of good reasons” to get rid of the U.S. debt ceiling.

Trump is certainly not alone in championing the elimination of the debt ceiling. Senate Finance Chairman Orrin Hatch (R-Utah), House Minority Leader Nancy Pelosi (D-Calif.) and Senate Minority Leader Charles Schumer (D-N.Y.) all support the idea of eliminating the concept of a debt ceiling.

A little perspective is in order. Other developed and, for that matter, even developing countries around the world seem to operate just fine without the concept of a fixed debt ceiling. In fact, the only democratic country in the world with a debt ceiling other than the United States is Denmark. And, Denmark’s debt ceiling was intentionally set so high following the financial crisis that there is no reasonable potential of its being breached.

Other than Hatch, Republican congressional leaders are generally not in favor of abolishing this anachronistic and contrived concept, although Paul Ryan (R-Wis.) and John Cornyn (R-Texas) have expressed their opposition to the concept as well. The usual narrative that the debt ceiling provides a check on unfettered government spending is fallacious.

Raising the debt ceiling simply allows the U.S. government to make good on obligations that have already been incurred. The time to show fiscal restraint is when the appropriations are being approved, not when they come due. The debt ceiling doesn’t actually do anything to promote fiscal restraint, yet every time it needs to be raised it causes tremendous uncertainty for markets and discomfort with investors throughout the world.

Much like the movie “Groundhog Day,” it seems that the identical debate over raising the debt ceiling keeps happening over and over. In 2011, grandstanding over the debt ceiling sent the financial markets into a full-blown panic. One major impact was the downgrade of U.S. sovereign debt from AAA to AA+ by Standard & Poor’s, a decision that makes little sense based on the country’s ability to issue a sovereign currency.

In fact, today, two U.S.-based companies, Microsoft and Johnson & Johnson, inexplicably have higher credit ratings than the country itself. Philosopher George Santayana famously remarked that “those who cannot remember the past are condemned to repeat it.” It seems that Congress can’t even recall the recent past, as in 2013 there was another protracted debate about increasing the debt ceiling that roiled the financial markets.

It would, of course, be ludicrous for the U.S. government to default on the debt. If that were to happen, interest rates on the debt would rise and the U.S. government debt load would grow exponentially, as the government would need to borrow at higher rates to refinance both new and existing debt.

While defaulting on the debt is not in anyone’s best interest, in May of last year, then-candidate Trump suggested that he could reduce the national debt by negotiating with creditors for a partial payment. In honor of the late Walter Becker of Steely Dan fame, if that isn’t “pretzel logic,” I don’t know what is.

Robert R. Johnson, Ph.D., CFA, is president and chief executive officer of the American College of Financial Services. He is co-author of Strategic Value Investing, Invest with the Fed and Investment Banking for Dummies.

The views expressed by contributors are their own and are not the views of The Hill.